At the end of January, the head of the global interbank SWIFT network Gottfried Leibbrandt announced the launch of a joint project with the R3 blockchain banking consortium. As part of the partnership, a new payment standard will be launched, which will use the Corda blockchain for payments. How does the new initiative differ from previous attempts by SWIFT to integrate DLT solutions into its infrastructure, and why could this be a new milestone in the development of the crypto industry?
SWIFT and Blockchain: A History of Difficult Relationship
The Society for Worldwide Interbank Financial Telecommunication, or SWIFT, is a cooperative society and an international system for transmitting information and making payments, which has been used by banks around the world since 1973. The reason for the emergence of such a system was the urgent need for the rapid transfer of information between financial institutions through reliable channels.
Today, the SWIFT system is used by about 11,000 participating banks from more than 200 countries of the world. According to the U.S. Department of the Treasury, the system processes daily transactions totaling $5 trillion, making SWIFT the leader in cross-border payments in the banking sector. The system, however, has its drawbacks: the fees of the banks responsible for processing the transaction can be high, and it can take from 1 to 5 days to complete one transfer. These factors explain the interest of a financial institution in the distributed ledger technology (DLT).
According to Cointelegraph, the leadership of SWIFT first drew attention to the latest developments of the fintech industry in December 2015. Wim Raymaekers, head of the SWIFT global payments innovation (gpi) initiative, said that, among other innovations, the financial institution was considering the possibility of introducing the blockchain technology to make faster and more transparent cross-border payments. To this end, in April 2016, SWIFT, together with the Accenture consulting company, conducted a detailed analysis of the financial services market to identify the best ways of adopting innovative technology. But despite such weighty advantages as effective information dissemination, the ability to track data, simplified coordination, a high level of trust in the system, and network stability, both companies ultimately recognized the blockchain technology as unprepared for mass use by financial sector participants. The report emphasized that the technology had to solve problems in the areas of scalability, non-compliance with regulatory requirements, weak data control and management, and the lack of a user identification structure before it could be implemented on an industrial scale.
But a year later, in April 2017, SWIFT announced the launch of a joint project with Hyperledger Fabric, an open distributed system for developing applications and specialized business solutions based on the blockchain, which was launched by Linux in 2015. Thanks to the Hyperledger Fabric code base, SWIFT was able to test DLT solutions for improving the reconciliation of nostro accounts in its own sandbox, which consisted of 34 banking organizations. The goal of the experiment was to develop a Proof-of-Concept (PoC) application that would harmonize international correspondent accounts in real time.
But the results were not so encouraging. Although the technology allowed for more efficient verification of nostro accounts and, in general, better control of banking liquidity, the blockchain network was not ready for large-scale implementation in the banking sector. Damien Vanderveken, Head of Research and Development at SWIFT, said:
“The PoC went extremely well, proving the fantastic progress that has been made with DLT and the Hyperledger Fabric 1.0 in particular. The DLT sandbox enabled us to control access, to define and enforce user privileges, to physically segregate confidential data and store it only with the relevant parties while supporting a strong identity framework by linking all participants to their BIC, and having all keys signed by a SWIFT certification authority.”
In an interview with the Financial Times, Vanderveken stressed that most banks would have to switch to a new, more modern infrastructure before implementing DLT solutions within their organizations. So, for testing the blockchain, 528 channels were created, combining the nostro accounts of the participating banks to ensure the complete protection of confidential information. To fully integrate the blockchain system into all banks, it will be necessary to start and maintain the operation of more than 100,000 such channels.
A New Partner, R3
On January 30 of this year, SWIFT has announced that it does not intend to abandon the idea of introducing the blockchain technology. That is what the financial giant’s chief said during a speech at the Fintech Forum in Paris, where he announced a partnership with the R3 consortium:
“We are announcing later today a Proof-of-Concept with the R3 blockchain on trade where you can initiate a payment on the trade platform and then it goes into gpi.”
R3 is a blockchain consortium that develops solutions for the financial sector. The consortium was founded in 2015, and in 2017, it attracted $107 million of investments. At the end of the same year, the company presented the Corda solution designed to reduce costs in the execution of various business operations. The number of R3 participants includes more than 300 companies, including UBS Group AG, Deutsche Bank AG, Barclays Plc., Bank of America Corp., Thomson Reuters Corp., and the Russian payment system Qiwi. The company’s two main products are the open-source Corda blockchain platform and the Corda Enterprise platform for commercial use.
In partnership with R3, SWIFT will connect the gpi Link payment gateway to the Corda blockchain platform. According to the official announcement, gpi Link will become a new standard for international payments, which will allow companies using Corda to accept and authorize payments via the gpi network, make settlements with banks, and receive confirmation of the loan in real time. Thus, the new standard will not only speed up work with cross-border payments but also make the whole process more transparent. In the future, SWIFT plans to connect the payment gateway to other blockchain networks and, accordingly, to more trading platforms.
R3 will become a connecting element between SWIFT and DLT solutions. As noted by the Luc Meurant, SWIFT’s chief marketing officer, while DLT-enabled trade is taking off, there is still little appetite for settlement in cryptocurrencies and a pressing need for fast and safe settlement in fiat currencies.
“With the gpi Link, banks will be able to provide rapid, transparent settlement services to e-commerce and trading platforms […] Given the adoption of the Corda platform by trade ecosystems, it was a natural choice to run this Proof-of-Concept with R3.”
According to the official statement, the results of the new PoC will be announced in September 2019 in London.